By Mike Miles
Can you solve this real-life dilemma for our fictional buyer? If so, you have a chance to win a $25 gift card to Corinth Square. Here’s the situation:
Mike Hosmer wants to buy a home but is having trouble finding the perfect place. He wants something that has enough space to grow into, has been updated, and is within his budget. The challenge is that the updated homes are beyond his budget, and the affordable homes are too small.
After looking for several months, Mike begins to think about purchasing something that needs some updating. He hopes that this will increase the number of homes available to him and avoid competitive, multiple-offer situations.
After modifying his search, Mike found a house and wants to make an offer for $300,000. Mike was pre-approved with Fountain Mortgage based off the following criteria:
- Approved to borrow up to $350,000
- Down payment of 20 percent as verified by documented assets
- 30-year conventional loan
Because Mike can borrow up to $350,000, he is budgeting around $50,000 for the repairs and upgrades. How could/should Mike go about paying for the improvements considering he was planning on putting 20 percent down from the sale proceeds of his current home?
Below are a few options for Mike to consider. What do you think Mike should do? Before you answer the question, here is the loan scenario.
- Purchase price: $300,000
- Down payment: $60,000
- Loan amount: $240,000
- Loan payment: $1,145 (principal and interest only)
Buy the house as-is, and apply the 20 percent down payment as Mike originally planned. He would then have 20 percent equity available to borrow on a home equity line of credit (HELOC) to pay for the repairs and upgrades. This HELOC loan would be a second lien and could have a payment associated with it of about $300, bringing his mortgage and HELOC monthly payments to around $1,445.
Buy the house as-is, and put the minimum down payment required for a non-first-time buyer – 5 percent. Mike would finance the rest. He would be required to pay private mortgage insurance (PMI) because he wouldn’t have 20 percent equity, which is needed to avoid PMI. The 5 percent down payment equals $15,000. His principal and interest payment would increase to $1,360 and his estimated PMI would be $90; totaling $1,450. Doing this keeps $45,000 in Mike’s pocket to pay for the repairs and upgrades.
Buy the house using a renovation loan to finance the repairs and upgrades. Mike can still apply his planned 20 percent down payment. However, instead of using a second lien (HELOC) to finance things, the renovation loan option adds the $50,000 to the original amount borrowed for a total loan amount of $290,000.
The renovation loan is a conventional 30-year fixed loan, but it typically adds .25 or .375 percent to the interest rate. Additionally, the closing costs are about $2,000 higher as there are additional appraisal and inspection fees associated. The renovation loan requires a contractor to provide a scope of work, which is what the appraiser uses to establish a value for the home after the renovation is complete. This scope must be done and finalized prior to the loan being able to close. The estimated principle and interest payment for Mike using this scenario is about $1,450.
Which one do you think Mike should choose? Comment with your answer below by Monday, October 16 at 5 p.m. If you choose the scenario that Fountain Mortgage owner Mike Miles thinks is best, you’ll be entered to win a $25 gift card to Corinth Square. Good luck!
This weekly Sponsored Column is written by Mike Miles of Fountain Mortgage. Located in Prairie Village, Fountain Mortgage is dedicated to educating, and thus empowering, clients to make the best financial decision possible for their situation. Contact Fountain today.
Mike Miles NMLS ID: 265927; Fountain Mortgage NMLS: 1138268